Single-family rental houses are havens for aspiring homeowners

WASHINGTON — Could rental houses owned and managed by deep-pocketed hedge funds and big investors be the post-bust steppingstones to homeownership for huge numbers of renters?

Could they also provide a form of safe harbor or sanctuary for thousands of families who were displaced by financial difficulties from their previous homes through foreclosures or short sales?

A new national study suggests that the answer to both questions is yes.

Over the last five years, according to Wall Street analysts' estimates, between $7 billion and $9 billion worth of distressed single-family homes have been purchased and converted to rentals by institutional investors such as hedge funds, private partnerships of high-net-worth individuals and even pools of capital raised among investors in foreign countries.

Unlike traditional "mom and pop" rental home investors, these funds have been scooping up dozens, sometimes hundreds, of properties at a time through all-cash purchases of foreclosures, short sales and bulk packages. Some of the bulk acquisitions have come from the troubled-asset portfolios of financing giants Fannie Mae and Freddie Mac, others from banks that have taken over homes left by strategic defaulters.

Although single-family rental homes have long been a part of the American housing scene, the involvement of large-scale institutional investors is causing the category to explode. According to a new study conducted by pollster ORC International for Premier Property Management Group, a company that works with investors, roughly 52% of rental units in the country are now single-family homes and house 27% of renters.

Recent Census Bureau data cited in the study indicate that the number of single-family rentals grew 21% from 2005 to 2010 — from the top of the boom through the depths of the bust and foreclosure crisis — compared with a 4% increase in total housing units.

What's the significance of this rapid conversion of ownership units to rentals?

For one thing, according to Mark Fleming, chief economist for CoreLogic, a mortgage and real estate research firm, mass conversions are contributing to the severe declines in homes-for-sale inventories in markets where foreclosure rates were most pronounced during the bust. Lack of inventory, in turn, is pushing up prices of entry-level homes in those areas.

But the ORC-Premier study suggests that the new waves of single-family rentals may also be providing important pathways to homeownership, not only for first-timers but also for those displaced by the housing bust. Fully 60% of rental home tenants say they plan to buy a house sometime in the next five years. By contrast, only 44% of multifamily apartment building renters have similar plans.

According to the study, the high interest in ownership "reflects the new roles single-family rentals are fulfilling as a steppingstone to homeownership both for first-time buyers and as a sanctuary for large numbers of families displaced by foreclosure but who plan to buy again when they can afford to do so."

The study found that, compared with apartment tenants, single-family renters made more money ($75,000 to $100,000 versus $50,000 to $75,000), had more children in their homes and were more concerned about local school quality and community facilities such as parks and recreation areas.

Asked by interviewers what impediments to buying a house they anticipate within the coming five years, nearly a third said they may not be able to qualify for a mortgage. The time frame coincides with the number of years it takes for individuals with seriously damaged credit files — because of a foreclosure, bankruptcy, short sale or multiple defaults on other debt obligations — to build back their credit scores to a level that would qualify them for a home loan on favorable terms.

Bottom line from the study: Single-family rentals are likely to remain a growing factor in the housing market, as incubators and havens for future buyers. At the same time, though, they may — at least temporarily — depress the national homeownership rate, which stands around 65%, down from 69% during the boom.